Further extension of loan moratorium period may affect credit discipline: RBI to SC

The RBI filed a fresh affidavit in the Supreme Court which is hearing a plea that raises the question of charging of interest on interest for loan repayments during the moratorium period.

Continuation of the loan moratorium period beyond the six months already allowed may affect the overall credit discipline and it will be the small borrowers who will ultimately feel the pinch, the Reserve Bank of India (RBI) has told the Supreme Court.

A more “durable solution” is provided by the Resolution Framework for Covid19-releted Stress, announced by it on August 6, 2020, the RBI said, adding it “enables the lenders to implement a resolution plan in respect of personal loans as well as other exposures affected due to Covid19, subject to the prescribed conditions, without asset classification downgrade”.

In a fresh affidavit filed in the top court which is hearing a plea that raises the question of charging of interest on interest for loan repayments during the moratorium period, the apex bank said “a long moratorium exceeding six months can also impact credit behaviour of borrowers and increase the risks of delinquencies post resumption of scheduled payments. It may result in vitiating the overall credit discipline which will have a debilitating impact on the process of credit creation in the economy. It will be the small borrowers which may end up bearing the brunt of the impact as their access to formal lending channels is critically dependent on the credit culture”.

In an earlier affidavit, the Union Finance Ministry had told the court the government had decided to waive off interest on interest in respect of MSME and other personal loans of up to Rs 2 crore during the six-month moratorium period.

The fresh affidavit by the RBI said “continuation of temporary moratorium” beyond the six month period already allowed “would not even be in the interest of borrowers. It may not be sufficient in addressing deeper cash flow problems of the borrowers and in fact exacerbate the repayment pressures for the borrowers”.

“Therefore, a more durable solution was needed to rebalance the debt burden of viable borrowers, both businesses as well as individuals, relative to their cash flow generation abilities. It was with this consideration in mind that the Reserve Bank has announced the Resolution Framework for Covid19-releted Stress… on August 6, 2020, which enables the lenders to implement a resolution plan in respect of personal loans as well as other exposures affected due to Covid19, subject to the prescribed conditions, without asset classification downgrade. The framework, inter alia, permits extension of the moratorium by a maximum of two years,” it added.

Hearing the case on September 3, the SC had directed that accounts which have not been declared as Non Performing Assets (NPAs) as on August 31 should not be declared so till further orders.

The RBI urged the court to “immediately” lift this “across the board stay” and said if not it “it shall have huge implications for the banking system, apart from undermining” its “regulatory mandate”.

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